A Capital Allowance
Using business allowances for plant & machinery in your holiday home can significantly reduce your tax burden.
One of the things driving the popularity of holiday lets in recent years has been the low interest rate environment and the concept of ‘My holiday home is my pension’. Regular readers may remember my article on the subject last year- you can read it on the blog at http://blog.abovebeachcottages.co.uk/my-holiday-home-is-my-pension-has-j.... A key part of this is the concept of losses incurred in renovating the property or running with a large mortgage in early years being carried forward to use against profits at a later date.
Capital allowances are available of course on items bought such as furniture and fittings but there is a more complex area related to items that are built in to the property and were acquired with it. Now before I go any further let me make it clear that I am not an accountant or tax advisor, I may not be up to date on latest legislation or even correct about any aspect of the rules, all I’m able to do is to collate relevant information for holiday home owners and try to present it in an easy to understand fashion. You should consult with a properly qualified person if you want to investigate further.
The term ‘P & M’ standing for plant and machinery is often used to describe this sort of allowance and this is a good way of thinking about it. If you buy a factory then a proportion of the purchase price relates to machinery, electrics, plumbing and everything else that went into turning the property from an empty industrial unit into a working production centre. For a holiday let the kitchen, bathrooms, plumbing, electrics and heating could all be categorised as ‘P & M’ and either written down completely under annual investment allowance rules or as a reducing balance over time.
What proportion of a property is allowable?
There isn’t a hard and fast rule, in theory it is the proportion of cost of the original build that relates to the capital items which will clearly vary. In a luxury villa with swimming pool and air conditioning in a country where land is cheap, plant & machinery could easily be more than 50% of the value but for a typical cottage in Cornwall something in the 10% – 20% range is probably realistic and unlikely to be challenged by the Revenue.
How would this work in practice?
If you’re in the process of buying a holiday home or bought one in this or the previous tax year then my understanding is that the allowance can be taken at 100% so a £350k cottage could generate a capital allowance of £50k which would be offset against future profit saving £20k for a higher rate taxpayer. Retrospective claims for owners who have had their properties for longer than this probably have to be written down at perhaps 8% a year on a reducing balance basis so in this case the first year tax saving would be £1,600 for a higher rate payer and this would apply in subsequent years according to the reducing balance.
It’s not all plain sailing here as there are potential consequences if circumstances change such as swapping to buy to let or ceasing holiday letting and the tax position on sale of the property could be affected. As I’ve already said this is a complex area requiring specialist advice but there’s no doubt that it may be well worth exploring.